Now is the time again when you might plan your finances and investments basis your likely income flow and future financial goals and given the low interest rate regime for long term investments you definitely have to have a larger portion into equity and neither can ignore the yellow metal that is thought of as both as a safe-haven and inflationary hedge. And after a roller-coaster, you may as well be willing to know how gold may perform in the new fiscal year after climbing to record highs in the interim of FY21.
Now the factors currently weighing on gold price are:
Rising US 10-year treasury yield as well:
10-year US treasury yield has gone down below 1.7 percent. As can be explained here treasuries as well as gold both are considered to be safe-haven and so there exist positive correlation between bond prices and gold and negative correlation between bond yield and gold. This is because there is an opportunity cost of holding gold which does not bears any interest income so funds move from gold to bonds, weighing negatively for gold prices.
Also, at the same time the rise in bond yield have raised expectations of a hike in interest rate. Though, countries including the US, Bank of Japan have committed to maintain low interest rates for long.
Gains in the dollar:
Dollar has retreated lower in today's trade but most of the economic indicators for the US economy in recent time have been optimistic including the GDP outcome, robust manufacturing data and a fall in number of US citizens claiming unemployment benefit and this has lent support to the dollar which is now gaining ground. This has also weighed on gold prices.
Threat of governments and central bank rolling back stimulus measures:
As and when there is seen normalization of economic activity, government's as well as central banks may roll back the various stimulus measures provided to trigger economic revival. This approach has been already taken on to by some of the nations such as Brazil to tackle inflation.
Investment demand for gold has seen a hit even though gold price has corrected sharply
Owing to volatility in the yellow metal, investors have offloaded their position in gold and as per SPDR ETF data, while gold holdings in September 2020 were reported at 1278 tonnes, these have substantially come down to 1040 tonnes as per last reports.
So, while any sharp run in gold similar to that witnessed in 2020 will not be possible without drastic dollar losses, there is still steam left for the gold to run up owing to coronavirus which continues unabated and also because of several other geo-political risk facing the world. Besides, global central banks liquidity tap which may continue to run until there is strong economic rebound will also support gold prices.
For investors it may again be a volatile year for gold with prices swinging between Rs. 42000 to Rs. 60000 per 10 gm. Buying on dips for gold is suggested to maintain 10-15% allocation in gold.